FRM Glossary · Part II · Credit Risk

Probability of Default (PD)

The likelihood that a borrower fails to make a scheduled payment over a given horizon — the foundation of credit-risk modelling.

In more detail

PD is typically estimated from historical default data, rating migrations, or market-implied from CDS spreads. Through-the-cycle (TTC) PDs smooth out macroeconomic fluctuations; point-in-time (PIT) PDs respond to current conditions. PD × LGD × EAD is the expected loss on a facility.